What can you do if your MCA is overwhelming you? Is there any way to reduce the amount coming out of your bank account every day? This is the question that business owners across the country - whether they’re new to merchant cash advances or experienced veterans - ask their business advisors. At Delancey Street, we hear it from owners who took a merchant cash advance and then watched their sales slip.
A merchant cash advance is not supposed to be paid like a loan. The funder buys a share of your future revenue at a discount, and the daily payment is a certain percentage of your daily revenue. Ideally, the daily payment goes up and down depending on your business. The agreement usually calls that share the Specified Percentage, and the payment is meant to equal that percentage multiplied by your daily or weekly revenue. When your sales slow down, your payments should slow down too.
But the funder will not lower the payment on its own. The way to get there is written into the agreement itself, in a reconciliation provision, sometimes called a true-up, and an adjustment clause. The reconciliation provision requires the funder to send a refund for any excess it collected during a downturn. An adjustment, sometimes also called a reconciliation, requires the funder to lower the daily or weekly payment to reflect the downturn. On paper, that all sounds great, right? The funder still has to be asked.
These clauses are not a favor from the funder, either. Funders argue that an MCA is not a loan, so there is no usury charge, because if the business fails or goes into bankruptcy, the funder loses all its investment. Some courts have agreed with that argument, but that argument depends upon having the right in the contract to lower the payments. If the funder refuses that right, or even if they treat it as a loan, it could be considered an illegal loan, and in New York a loan charging more than 25% a year is criminally usurious. Where your agreement includes an adjustment clause, the payment reduction is owed as a contractual matter.
Make the Request
So how do you actually make the request? Start by reading your agreement. Find the true-up clause, or the language about true-ups or reconciliation, and any clauses about adjustment. Understanding how it should work on paper is important, because that lets you know how it should work in reality. Then, try to communicate your needs. If possible, show the funder a comparison of your sales since the advance was drawn, and explain the problems you’ve been facing. Will the funder reduce the payment? There’s no guarantee, but the request should name both remedies: a reconciliation of what has already been collected, and an adjustment of the payment going forward. Explain what is happening with the business, calmly but decisively, and give clear instructions on what you want. Include documentation or evidence if you have it. Don’t waste time and ink complaining, harping on your hardships, or whining. Just state your case.
One more thing about paperwork: if the funder asks for copies of your AR reports or invoices, you must deliver them. Typically, without a request from the funder, you do not have to keep providing it with receivables.
Be Careful
While you wait for an answer, be careful about what you do on your own end. As tempting as it may be to make your best case by breaking the agreement, shutting down your account, or leaving the market altogether, resist it. It may be an event of default if you block the funders’ automatic debit transfers, if you have too many bounced debit transfers for insufficient funds in a given time, if you change your bank account without telling the funder, if you close your bank account without telling the funders, or if you open a new bank account without notification. Once you are in default, it can be a difficult situation to come out of. Don’t take on any additional advances to cover the payments, either; you don’t want to give them an excuse to back off.
That second advance is what the industry calls stacking. It’s when an owner takes another advance from a different provider, in addition to the one they have already. MCAs are very expensive. Owners are often forced to take additional advances in order to stay ahead of the expensive payments. Funders usually charge an additional fee if an MCA owner defaults on the payments due to stacking. Keeping one advance going is already a challenge; don’t stack the deck against yourself.
Watch out, too, for what people in the industry call the carrot: the funder promises a bigger advance in the future, if you pay off your current advance early, or a bigger loan that they never give you, and so they encourage you to make their payments even when your business can’t afford them. It is, indeed, often a very shiny carrot. Stay away.
Not Every Funder
Unfortunately, not every funder honors its own contract. Some funders refuse to reduce payments or reconcile. Some may double, triple, or even quadruple debit the bank account. Some may even collect more than the original Purchased Amount, or continue collecting a monthly fee after the Purchased Amount has been paid in full. It may be tempting to blame the funder, as if it went against its word, but that won’t help the situation. What helps is a record of your request, your proof and the funder’s answer, because if the funder breached the agreement, committed fraud or otherwise acted wrongly, there may be grounds not to pay at all.
It also helps to know what happens if the business does fall into default: the funder can file and enforce its UCC lien against the assets of your business, including clients and customers, without ever going to court. In addition, the funder can sue in either state or federal court, for breach of contract and the personal guarantee. It can do both things at the same time. The first sign may be that a customer tells you they got a letter from the funder instructing them to pay the funder and not you. Or you get a Summons and Complaint in the mail. Or, worst of all, there is no summons; your bank account is frozen. Ignoring the lawsuit can result in a default judgment against your business and you as its guarantor.
A reduced payment is not the only way out, either. A merchant cash advance can also be settled, meaning it can be paid off for less than the total balance. But if you don’t have help, the funder will drive to terms that are better for it and you might not even know what to request in the settlement agreement. That is the work we do at Delancey Street. Our senior advisors negotiate with funders and lenders for less than the full balance owed, and we do not sell you another loan. We are not a law firm; when litigation or bankruptcy is the right call, we refer owners to a vetted independent attorney. A first consultation is free and confidential.
If you’re an owner in crisis, you might be in a panic about the pressure of the payments, or in denial, pretending that tomorrow the business will turn around. Neither one lowers the payment. A request, backed by your contract and your numbers, at least puts the question to the funder.
